Carbon Tax

The other day, I listened to a podcast about taxes. (Please don’t shut down this post immediately; it was a thought exercise more than anything else.) The idea they advanced was that taxes fall into roughly three categories. There is the rational tax (the land use tax is this kind of tax) where you say, “OK, the government needs this much money to function. What kind of tax can we introduce that would be simple, encourage economic activity and pay for everything?” Very few localities have tried the land use tax however, smart economists estimate that if one was introduced, it could replace or almost replace all the other taxes we currently pay. Then there is the politically motivated tax. That’s where you say, “OK, I want to build a playground yesterday and there isn’t money in the budget for that playground. What is the most politically acceptable tax I can introduce that will pay for that playground?” It’s because of many taxes like this—and not due to any nefarious scheme—that our tax code is as complicated as it is. And then there is the behavioral tax. The tobacco tax is a good example. That’s when you say, “OK, we have a real problem here—people smoking and dying of terrible illnesses as a result. How can we (short of outlawing smoking) change people’s behavior?”

The guys spent most of their time talking about the land use tax (apparently a tax reformers’ favorite topic since John Smith) but they also touched on some of the more popular taxes of the day: the sugar tax and the Carbon tax. Since I am very pro-clean air and water (and since California has a Carbon tax, I was quite interested in what they had to say about it. I was especially interested in whether it was an effective behavior tax. In other words—did it really stop people from polluting? The answer, it turns out is no, it doesn’t. Or at least it doesn’t to any great extent.

I have to admit I was pretty shocked to hear that. Here, I have to come clean. I am a Democrat and it’s pretty much an article of faith among Democrats especially that carbon tax is how you reduce emissions. So I was a little reluctant to abandon this notion. So I did some research on my own. Turns out, they were right. Norway has one of the highest carbon taxes in the world—and has had these taxes in place since 1991. It reduced its carbon emissions by a whopping 2.3 percent. By contrast, if we were to cut our beef consumption by half, our emissions would decrease by 25-40 percent. (It might also not be terrible for our obesity issues either.) So—why are we taxing carbon emissions (which have an almost negligible effect on emissions) rather than paying dairy farmers to grow something else. Like trees, for example.

Turns out there are two reasons for this. If a carbon tax were imposed nationwide it would generate about $1.2 trillion dollars. In California alone, the carbon tax raised approximately $3.1 billion dollars which were used for many much-needed programs. But the probably bigger reason is that the dairy (or agricultural) lobby is so incredibly powerful the world over. In the US, the lobby kept even mention of the fact that cows produce CO2 from the Clean Air Act and in Canada they are fighting hard to prevent American, New Zealand and Australian milk from touching Canadian supermarkets. In other words, you cross the dairy lobby at your peril.

So what does it all up to? Well, if we want to raise funds for more parks and roads quickly—that is without a major political fight, then the carbon tax may be a good idea. Depending on how high the tax is, we might cut emissions by 2 percent and growing more trees will reduce out carbon footprint. If however our goal is to quickly cut emissions we should cut how much beef we consume. Or, put it a different way—the carbon tax is mostly a political tax with some behavioral benefits.